On August 15, 2024, the Internal Revenue Service (IRS) announced the opening of the application period for the 2025 Compliance Assurance Process (CAP) program, which will run from September 4 to October 31, 2024. CAP is a voluntary real-time issue resolution program to address issues prior to the filing of the tax return in a manner that is more transparent and cooperative than a traditional IRS audit.

The recent announcement also reflected several important changes to the CAP program for 2025, many of which are taxpayer favorable. Perhaps most significantly, privately held C corporations may now apply to the CAP program. Most recently, the CAP program was only open to publicly traded C corporations. Privately held C corporations that apply to the program will have to provide audited financial statements specific to the applicant in accordance with U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or another method deemed appropriate by the IRS. 

The 2025 CAP program will also have an additional exception to the open year criteria. The general rule is that the CAP applicant can have only one open filed return and one open unfiled return on the first day of the CAP applicant's tax year. For a calendar year taxpayer, that would mean that as of January 1, 2025, the taxpayer would have the 2023 year still under review and the 2024 year as-yet unfiled. The 2025 program will continue certain exceptions to the requirement, such as a pending Advance Pricing Agreement (APA) resolution or Competent Authority Assistance. In addition, the 2025 CAP program is adding an exception for years that have continued to be held open due to resolution of issues for involving implementation of new Inflation Reduction Act (IRA) provisions such as the Corporate Alternative Minimum Tax (CAMT), the stock buy-back excise tax, and clean energy credits. Our understanding is that the 2025 CAP program will also allow a similar exception for years held open for other recently enacted provisions, such as the investment credit in the CHIPS and Science Act. 

The August announcement also indicated that the Bridge Plus phase is being made a permanent part of the CAP program. The Bridge Plus phase replaces the Bridge phase, which was added to the revamped CAP program in 2019. A taxpayer was not subject to any pre-filing review and received no assurance that its positions on its return would be accepted. The Bridge Plus phase, operated as a pilot for several years, includes some limited pre-filing review of certain taxpayer documentation and, if all goes well, a letter reflecting the IRS's acceptance of the return as filed. In the now-permanent Bridge Plus phase, the taxpayer will be required to provide a book-to-tax reconciliation, credit utilization, and other supporting documentation shortly after their audited financial statements are finalized. The taxpayer also will submit a draft return 30 days before its filing. The IRS team will review the draft return for consistency with the taxpayer's previously submitted documentation. If the draft return is consistent with the documentation previously provided, the taxpayer will be instructed, accordingly, to file the tax return. If the filed tax return is consistent with the previously submitted documentation and the draft return, the taxpayer will be issued an appropriate acceptance letter. 

Somewhat less taxpayer-favorable is that applicants for the 2025 CAP program must submit a new form targeting cross-border activities. As in prior years, CAP applicants will be required to submit the CAP Research Credit Questionnaire (CRCQ) and the Material Intercompany Transactions Template (MITT) to help the CAP team identify the research credit and transfer pricing issues that warrant the application of time and resources and deselect those that do not. In a similar vein, and in recognition that the 2017 Tax Cuts and Jobs Act (TCJA) "greatly contributed to the scope and complexity of international issues," the 2025 CAP application must include a completed Form 14234-E Cross Border Activities Questionnaire (CBAQ). 

Only a few years ago, the CAP program appeared to be at risk of discontinuation. The announcement of the opening of the 2025 CAP program indicates that the current Large Business & International (LB&I) management recognizes that the reinvigorated CAP program provides an important dispute resolution tool that can be in the best interests of both taxpayers and the government.

The IRS will inform applicants in February 2025 if they are accepted into the CAP program. 

For more information, please contact:

George A. Hani, ghani@milchev.com, 202-626-5953

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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